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April 17, 2013

Sheila Bair: Low Interest Rates Hurting Economy

Former FDIC chairwoman is the latest high-profile official to voice concern

In an interview on Wednesday with The Daily Ticker, Bair, now a senior advisor to the Pew Charitable Trusts, specifically said that the low interest rate strategy promoted by the Fed to goose the economy is “backfiring.”

“The Fed has got the best of intentions…but it’s counterintuitive,” she told the website. “Low rates dampen the incentives to invest.”

The Fed’s monetary policies have made it more difficult for banks to generate revenue, forcing them to seek profits in other ways, she noted.

“It’s very difficult to make a loan of a multiyear duration because you have this very low interest rate on your balance sheet,” Bair said. “That’s not good for business lending. Banks can make money in other ways—trading profits, investment banking fees, deposit accounts—other ways…that don’t necessarily help the economy.”

Business lending, not home refinancing, holds the key to the economic recovery, according to Bair. The U.S. needs to shift its economic priorities if a full recovery is to happen, Bair added.

“Our economic policies are too much aligned with trying to revitalize the economy we had pre-2007,” she said. “To have a sustainable growth model for everybody, including banks, we need to get more jobs and we need to get real wages going up again.”

As the Daily Ticker noted, Bair would like to see the Fed increase rates but in a gradual and methodical manner so the market can adjust. The Fed has reiterated that it will not reverse its strategy until unemployment falls to 6.5%, it added. The jobless rate in March dropped to 7.6% from 7.7% in February.

Some Fed members have become more vocal about ending the central bank’s aggressive monetary easing while others such as Federal Reserve Vice Chairwoman Janet Yellen and Chicago Fed Governor Charles Evans have argued that the bank needs to do more to stimulate the economy and boost hiring, the website concludes.